Bitcoin users caught between hackers and regulators

A group of users of bitcoins, the virtual currency, meets every Thursday in Tokyo. This week, there is a lot to discuss.

It has been a rough month for bitcoin with cyber attacks on several exchanges, wild fluctuations in value and rising pressure from regulators.

One of the largest exchanges, Mt Gox, which is based in Tokyo, stopped trading on February 7 and went dark on Tuesday, sparking speculation about the whereabouts of the money it held and of its CEO, Mark Karpeles.

Bitcoin prices, which can vary between exchanges, continued their rollercoaster ride Thursday. The Winkdex index put the price at close to 600 dollars, down 6.0 percent in 24 hours. At the start of February, the Washington Post calculated that Bitcoin had begun 2013 trading at 13.50 dollars, reached 130 dollars by October before rising to 1,242 dollars, crashing to 455 dollars and stabilizing around 900 dollars.

In Washington, Senator Joe Manchin wrote to federal regulators urging a US ban on bitcoins.

"This virtual currency is currently unregulated and has allowed users to participate in illicit activity, while also being highly unstable and disruptive to our economy," Manchin said in his letter to the Federal Reserve and other regulatory heads. "I urge regulators to take appropriate action to limit the abilities of this highly unstable currency."

A Bitcoin derivatives company – btc.sx – said Thursday it was suspending trading "due to the current closure of our main partner exchange".

"All customer balances are secure and we will honour any withdrawal requests," the company, which allows investors to carry out leveraged trades against the future price of a bitcoin, said.

Criminals, regulators and hackers

Created in 2009, bitcoin is a form of electronic money independent of traditional banking. It relies on a network of computers that solve complex mathematical problems as part of a process that verifies and permanently records the details of every bitcoin transaction that is made. At current prices, the bitcoin market is worth about 7 billion dollars.

While proponents of bitcoin hail its anonymity and lack of ties to traditional banking, its popularity with criminals and its volatility have caught the attention of regulators. It has also attracted hackers.

In the attacks – known as distributed denial of service – hackers overwhelmed exchanges by sending thousands of phantom transactions. At least three exchanges were forced to halt withdrawals on Feb. 7, including Mt. Gox, headed by Karpeles, which was the largest at the time.

Mt. Gox seems to have had a second longer-term problem related to an element of bitcoin programming known as "malleability", which allowed hackers to be paid twice for one transaction.

A document circulating on the Internet purporting to be a draft crisis plan for Mt. Gox said more than 744,000 bitcoins were "missing due to malleability-related theft" that had gone unnoticed for years. That number would be worth almost 450 million dollars at Thursday’s exchange rates. It would also represent 6 per cent of the 12.4 million bitcoins “minted”.

Karpeles re-emerged on Wednesday, posting a statement on the Mt. Gox site.

"As there is a lot of speculation regarding Mt Gox and its future, I would like to use this opportunity to reassure everyone that I am still in Japan, and working very hard with the support of different parties to find a solution to our recent issues," Karpeles said.

'Something really bad going on'

But Mike Hearn, a bitcoin developer in Zurich, Switzerland is wary.

"Mt Gox has been broken and it was obvious there was something really bad going on there for nearly a year. They were processing withdrawals very slowly and generally being very opaque about what was going on there."

Some of the members of "Bitcoin Tokyo" who were meeting on Thursday were bracing themselves for six-figure losses because of the problems at Mt. Gox.

"It's going to be dominated by the issue," said Jonathan Waller, co-organiser of the group, which works to promote the virtual currency in Japan.

Waller is one of a reported one million people who had an account at Mt. Gox and says his deposit was worth more than $100,000.

"We want to share information and discuss" what has happened, he said, adding that he was angry but felt quite powerless.